Last week, we talked about the "potential disaster" looming on March 18 when the FOMC hands down another interest rate cut. Well, that FOMC meeting is amost upon us, and the disaster is even more certain than it was a week ago. If the continued slide of the US Dollar this week isn't illustration enough, the panic moves by the Fed this week certainly should be.
When the Fed sprung its surprise move on March 11, offering $US 200 Billion worth of US Treasury paper for up to 28 days and accepting almost anything in return, up to and including the most toxic of the sludge which has poisoned the US financial system, there were a number of immediate reactions. US stock markets staged their biggest rally for years, with the Dow up a whopping 416 points on the day. Almost as quickly, financial analysts inside and outside the US came to the conclusions that a BIG US financial house must be in serious trouble. The consensus was Bear Stearns, the financial house which kicked off the credit freeze way back in June last year.
The consensus was correct. On March 14, the Dow fell almost 200 points and the stock price of Bear Stearns was cut in half on news that the Fed was bailing out the financial company by channeling funds in through JP Morgan Chase and Co. The Fed's Board of Governors had to vote on this one, because Bear Stearns is not a bank. Needless to say, the vote was unanimous.
On the stock market, the news of the Bear Stearns bailout overshadowed an awe inspiring report which came out from the US Labor Department. Officially, the US CPI for February (both non-core and core) was UNCHANGED from the previous month. Yep, Consumer Price Inflation in February 2008 moved by a grand total of precisely ZERO! This is indeed awe inspiring (or absurd, if you prefer) but it is by no means surprising. For two days before the official release of the February CPI, the mainstream financial press had been full of reports stating that the one potential "hurdle" the Fed faced in the lead up to March 18 was an "adverse" (read high) CPI report. "Adverse" the CPI number was not.
And if the CPI itself was amazing, the instant reaction to it was nothing short of breathtaking. On March 13, the day before the CPI number was announced, the "betting" on the US futures markets pointed towards a rate cut of 0.75 percent at the maximum with the majority looking at a 0.50% cut and some even predicting a cut of a picayune 0.25%. There was some talk about a 1.00 percent cut, but the futures boys didn't buy it. The betting on that one was a fat ZERO percent
What a difference a number, no matter how absurd, can make. On March 14, with the release of the February CPI, the futures "betting" on a March 18 rate cut of a full ONE PERCENT had gone from ZERO to well over SIXTY PERCENT. The rest of the "betting" was for a 0.75% cut. That is now the expectation on Wall Street - two thirds expect a ONE PERCENT cut and the rest are still "content" with a mere 0.75 percent. The mind boggles. So do Treasury yields, where the three-month bill rate fell to 1.16 percent on March 14 with the two-year note down to 1.48 percent - their lowest levels since September 2003 - when the Fed Funds rate was ONE PERCENT.
Even if the FOMC DOES cut by 1.0 percent when they meet on Tuesday, the Fed Funds rate will still be double what it was in September 2003. At present, it is three times as high. The yields on Treasury debt paper are ridiculously low. They have next to no downside left, in the face of a US Dollar that is still plummeting, having long since hit lows never seen before in the fiat currency era.
The Fed is left with the alternative of destroying the US financial system now by taking their hands off the interest rate lever or destroying it later, after they have destroyed the currency on which it is based. All over the world, the US Dollar is being slowly but surely abandoned. In every continent, US Dollars that were once surrogate cash are no longer acceptable. People everywhere are switching their savings from US Dollars to several other currencies, nobably Euros but also Yen, Yuan and even Australian and New Zealand Dollars. Inside the US, the claims that the economy is NOT in recession (or worse) are still being accepted - by some. Outside the US, the very suggestion is met with derision.
It is into this toxic mixture that Wall Street and the mainstream US financial press confidently expects the Fed to add a large dollop of still lower interest rates on March 18. Sure, Gold is $US 1000 and oil is $US 110. That's all just hedge fund speculation, according to the mainstream. It has nothing to do with the simple fact that the world is staring straight at the demise of the currency which has underpinned the global credit money system for three generations. Besides, we can't afford to worry about the Dollar, we've got a financial system to save!
It still has not dawned on the cheerleaders for lower official US rates that ANY financial system, however constituted, stands or falls on the QUALITY of its money. It has not dawned on most of those who are watching Gold flirt with $US 1000 either. That realisation is yet to dawn. If the US Dollar is no good anymore, switch to Euros or Yen or whatever. It doesn't matter, as long as you stay INSIDE "our" system. That is the unstated but increasingly desperate clarion call at present.
Oh, and by the way, remember all the comparisons made by us and many others that $US 850 Gold in January 1980 equates with a figure of $US 2200-2500 Gold today using official US Government CPI figures? Well, the CPI report for February 2008 shows just how manipulated the "formulas" which derive the CPI are. Somebody has now calculated the equivalent of January 1980 Gold today - using the formula which the US Government calculated the CPI back in January 1980.
Stripping out all the "alterations" and "fine tuning" which has been done over the past three decades is an eye opening exercise. Using the January 1980 "CPI formula", $US 850 Gold then equates to (just over) $US 6000 Gold now.
The chart has now gone as far as it can go without reaching or breaking through the $US 1000 level. Of course, spot future Gold traded above $US 1000 intraday on the last two days of this week. And in London, the PM fix on March 14 was $US 1003.50.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. Last week, with Gold at the verge of the $US 1000 level, Gold reached new bull market highs in all four currencies. This week, Gold traded above $US 1000 on March 13 and 14 intraday, yet only two of the four currencies below show new Gold bull market hights. This is a measure of the magnitude of the US Dollar fall this week, especially against the Euro and the Yen.
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